Control test for a private trust

The control test, in conjunction with the associates[2] rule, is used to determine the level of control[2] a stakeholder exercises in relation to a designated private trust. Although a trustee[2] often undertakes the day to day management of a trust, effective control of a trust generally rests with the person(s) who can:

dismiss and appoint a trustee,

veto a trustee's decision,

exercise control over the trustee in another manner, or

change the trust deed.

Position of control within a private trust

The person with the above power is commonly known as the appointor[2], or alternatively the principal or guardian. In the event that the trust does not have an appointor, or the trust deed does not provide the appointor with these powers, it may be that the trustee has effective control of the trust. Control can rest with one person, a couple, or multiple stakeholders. While being an appointor or trustee is a strong indicator that control of the trust may rest with that person, all factors relating to control are considered before a decision regarding the attribution of assets[2] of a trust is made.

Factors for establishing control of a private trust

if there is a sole appointor, attribution will generally be made to that appointor,

if the appointor is a professional, attribution will generally be made to the person(s) instructing the professional in relation to the affairs of the trust. If the professional is receiving instructions from an entity[2], attribution may be made to the controller(s) of that entity,

if there is no appointor, attribution may be made to the trustee[2] (or trustees) of the trust. If the trustee is a company, attribution of the trust assets would generally be to the person(s) who control the company,

if there are multiple trustees but one trustee clearly directs the exercise of the trustees' power, attribution will be made to that trustee,

if there are multiple trustees but there is a partnered couple acting as trustees who can jointly exercise control, attribution may be made to the members of that couple,

in any other circumstances, where there are multiple trustees, attribution may be made amongst those stakeholders who jointly exercise control. Attribution will be made in proportion to the capacity of those stakeholders to exercise control,

whether the trustee might reasonably be expected to act in accordance with the directions or wishes of the person(s),

for the purposes of the Guidelines, it is permissible for the delegate to look beyond the presumptions raised under the law of trusts.

Example of controlled private trust

George, aged 59, sets up a discretionary family trust with himself as appointor. The trust's assets consist of a $600,000 investment portfolio and the family home, which is worth $120,000. George appoints his son David as trustee, assured that he retains control via his power to unilaterally veto David's decisions or to replace David as trustee. George receives annual distributions from the trust at a level decided by him. Other trust income is officially distributed to children and grandchildren, however in reality George pays any taxation liability on behalf of his family and either unofficially retains the distributions or arranges for the distributions to be officially returned to the trust as a 'loan'. Under the control test[2], George would be attributed with the trust assets and income and would not have entitlement to an income support payment.

the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual/s to avoid Division 11A (means test of private companies and private trusts), section 52ZZB of the VEA or the equivalent section of the Social Security Act, or

There are two control tests, one is in relation to private trusts and other one is in relation to private companies.

Control test (private companies)

An individual passes the control test in relation to a company if:

the aggregate of the direct voting interests in the company held by individual or their associates is 50% or more,

the aggregate of the direct control interests in the company held by an individual or their associates is 15% or more,

the company is sufficiently influenced by the individual, their associates or 2 or more entities covered by the preceding dot points, or

the individual, either alone or with associates is in a position to exercise control over the company.

Control test (private trusts)

According to section 52ZZH(2) of the VEA, an individual passes the control test in relation to a trust if:

the individual, or their associate (VEA section 52ZZH(2))(other than an associate covered by paragraph 52ZQ(1)(j) of the VEA), is a trustee,

a group (VEA section 52ZQ(1))in relation to the individual can remove or appoint the trustee/s,

a group in relation to the individual can vary the trust deed or veto the trustee's decisions,

the total of the direct or indirect beneficial interests in the body or income of the trust held by the individual or their associates is 50% or more,

a group in relation to the individual had the power (by means of the group exercising any power of appointment, revocation or otherwise) to obtain, with or without the consent of any other entity, beneficial enjoyment of trust income or assets,

a group in relation to the individual was able in any manner whatsoever, directly or indirectly, to control the application of the trust income or assets,

a group in relation to the individual is capable under a scheme[2] of gaining beneficial enjoyment or control of the application of the trust, or

a trustee of the trust was accustomed, obliged (formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.

An individual passes the source test in relation to a trust or company if:

the individual has transferred property or services to the entity after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000, and

the underlying transfer was made for no consideration or for a consideration less than the arm's length amount[2] in relation to the underlying transfer.

Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA[13].

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA[13].

Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.

Trustee has two meanings depending on the context, (i) and (ii).

(i) a person who looks after someone else's affairs

According to section 202 of the VEA[13], a trustee is a person appointed by the Commission to administer the financial affairs of a pensioner who may be incapable of managing their own affairs for reasons such as:

age,

infirmity,

ill health, or

improvidence.

These criteria include circumstances where a pensioner has a psychiatric disorder or a mental illness as a result of alcohol or drug addiction.

A trustee can be appointed, with or without the consent of the pensioner and once appointed, a trustee has full control of the pension payment.

the company or trust owns a particular asset (alone, jointly or in common with another entity or entities),

had that asset been owned by the individual instead of by the company or trust, the value of the asset would not be required to be disregarded by any express provision of the VEA, and

the asset is not anexcluded asset.

there is to be included in the value of the individual's assets an amount equal to the individual's asset attribution percentage of the value of the asset owned by the trust or company.

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

Trustee has two meanings depending on the context, (i) and (ii).

(i) a person who looks after someone else's affairs

According to section 202 of the VEA[13], a trustee is a person appointed by the Commission to administer the financial affairs of a pensioner who may be incapable of managing their own affairs for reasons such as:

age,

infirmity,

ill health, or

improvidence.

These criteria include circumstances where a pensioner has a psychiatric disorder or a mental illness as a result of alcohol or drug addiction.

A trustee can be appointed, with or without the consent of the pensioner and once appointed, a trustee has full control of the pension payment.

any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, or

any scheme, plan, proposal, action, course of action or course of conduct, whether there are 2 or more parties or only one party involved.

There are two control tests, one is in relation to private trusts and other one is in relation to private companies.

Control test (private companies)

An individual passes the control test in relation to a company if:

the aggregate of the direct voting interests in the company held by individual or their associates is 50% or more,

the aggregate of the direct control interests in the company held by an individual or their associates is 15% or more,

the company is sufficiently influenced by the individual, their associates or 2 or more entities covered by the preceding dot points, or

the individual, either alone or with associates is in a position to exercise control over the company.

Control test (private trusts)

According to section 52ZZH(2) of the VEA, an individual passes the control test in relation to a trust if:

the individual, or their associate (VEA section 52ZZH(2))(other than an associate covered by paragraph 52ZQ(1)(j) of the VEA), is a trustee,

a group (VEA section 52ZQ(1))in relation to the individual can remove or appoint the trustee/s,

a group in relation to the individual can vary the trust deed or veto the trustee's decisions,

the total of the direct or indirect beneficial interests in the body or income of the trust held by the individual or their associates is 50% or more,

a group in relation to the individual had the power (by means of the group exercising any power of appointment, revocation or otherwise) to obtain, with or without the consent of any other entity, beneficial enjoyment of trust income or assets,

a group in relation to the individual was able in any manner whatsoever, directly or indirectly, to control the application of the trust income or assets,

a group in relation to the individual is capable under a scheme[2] of gaining beneficial enjoyment or control of the application of the trust, or

a trustee of the trust was accustomed, obliged (formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.